U.S., global markets down steeply Monday as recession worries drive investor jitters

A worse-than-expected jobs report last Friday, along with other recent data reflecting a slowing U.S. economy, helped drag down U.S. and international markets Monday as worries about a potential recession are once again in the conversation.

Along with recession concerns, some economists say the global sell-off is a function of an overheated investment realm going through the throes of a market reality adjustment.

Monday morning saw the Dow Jones Industrial Average drop 1,100 points, the NASDAQ composite slipped over 3%, and the S&P 500 was down around 2.6%. Japan’s Nikkei lost 12% of its value and European markets were down across the board.

At the end of regular trading Monday, the Dow declined 2.6%, S&P 500 stocks lost 3% overall and the Nasdaq index slipped over 3.4%.

Last Wednesday, Fed Chairman Jerome Powell waxed mostly positive about the rate at which the U.S. economy has cooled off in the face of an ongoing very restrictive policy stance by the monetary body, which voted unanimously at its July meeting to keep its federal funds rate at 5.25% to 5.5%, the highest in decades. Many economists feared the Fed’s post-pandemic strategy of aggressive interest rate escalation — levying 11 straight increases from March 2022 until July 2023 in hopes of driving down inflation — would drag the U.S. economy into recessionary conditions. However, those worries have yet to materialize as inflation has ebbed even as consumer spending and the U.S. jobs market has remained relatively robust.

But the Labor Department’s monthly jobs report was unexpectedly dismal, with U.S. businesses adding only 114,000 new, non-farm payroll jobs in July, a rate falling far short of the 175,000 expected by many economists and trailing well behind the 217,000 new jobs per month average over the past year. The annual unemployment rate hit its highest level since October 2021 in July, inching up from June’s 4.1%. The Labor Department’s July Employment Situation Summary found the number of unemployed people increased by 352,000 to 7.2 million last month. The new data reflects a significant rise in U.S. unemployment from 12 months ago, when the jobless rate was 3.5% and the number of unemployed people numbered 5.9 million.

Is a recession coming?

Renewed recession fears are helping drive the global sell-off alongside the sentiment from some economists that the Fed simply waited too long to start walking back its benchmark inter-bank lending rates.

While in no way guaranteeing a rate reduction will come at the Fed’s September meeting, Powell offered some foreshadowing of its likelihood, pending any unforeseen economic wobbles at a press conference after the body’s July policy meeting last week.

“We have made no decision about future meetings,” he said. “The broad sense of the committee is that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate.”

Powell said Fed officials will be monitoring and assessing all of the economic data set to come in before next month’s meeting and “the question will be whether the totality of the data, evolving outlook and balance of the risks are consistent with rising confidence on inflation and maintaining a solid labor market.”

“If that test is met, a reduction in our policy rate could be on the table at our next policy meeting in September,” Powell said.

Powell told reporters the Fed is closely monitoring the U.S. labor market and noted that “if we see something that looks like a more significant downturn, that would be something that we would have the intention of responding to.”

Recession fears or overdue market correction?

Some economists waved off a broader recession scare as the primary driver of Monday’s global declines, pointing to overvalued markets as the catalyst for the wave of sell-offs.

“This is not the recession train; it’s just a good old-fashioned market panic,” Joe Brusuelas, principal and chief economist for RSM US, told the Washington Post. “This is not a D.C.- inspired event, about a slowing job market or the Fed being behind the curve. It’s about a larger regime change, where investors are adjusting to the end of easy money globally.”